G.M. Plans Big Buyouts for Retirees in Pension

DETROIT — General Motors said Friday that it would offer lump-sum payments to thousands of white-collar retirees to reduce its pension obligations, which are the biggest in the nation, and would pay Prudential Insurance to take over its pension payments to other retirees.

The changes, which will eliminate about one-fifth of the automaker’s pension obligations, are intended in part to increase its appeal to investors.

Everyone affected by the change is already retired, and many will be able to spend the money without rolling it over into another retirement account, as long as they pay the appropriate taxes. The company is planning to provide extensive financial counseling to help people make the money last through their retirement years.

G.M. is following a similar move by the Ford Motor Company, which announced last month that it would offer retirees the chance to take their pensions as a single big check. Both automakers are seeking to reduce retiree-related costs.

“Clearly pensions have continued to be a significant issue for General Motors,” said Dan Ammann, G.M.’s chief financial officer, in a conference call with reporters. “It is important for us to mitigate the growth of these obligations.”

G.M.’s stock price fell 19 cents to $22.01 in trading Friday, a comparatively strong showing on a day when other auto shares and the general market were down significantly.

Philip Waldeck, Prudential’s head of pension and structured solutions, called the plan “a breakthrough transaction.”

“I think over time, others will follow,” he said.

Shedding pension obligations might indeed be attractive to other companies, especially those with pension plans so large they have started to overshadow the operating business and cause unpredictable fluctuations in cash flows. But for many companies, it would still be too expensive to pay an insurer to take over their pension obligations since pensions can become more costly to provide when interest rates are low, as they are now. G.M. is benefiting from investment changes it made in the last few years to make the value of its pension assets mirror the value of the obligations even when market conditions change.

In addition, legal changes this year allow companies to offer retirees lump-sum payments that have an equivalent economic value to the stream of monthly pensions they replace. In the past, companies had to pay a premium to retirees if they offered lump sums.

Mr. Ammann said that the pension changes announced on Friday would reduce G.M.’s total obligations, currently $134 billion, by $26 billion. Most of the cost will be paid with money the company had already set aside in its pension fund for salaried workers, but G.M. will put in an additional $4 billion from its corporate coffers.

G.M. said that even after sending roughly $29 billion of pension assets to Prudential, it will still have $8 billion of assets in the salaried workers’ pension fund. That will leave the plan $2 billion short of the total $10 billion that the company owes its current workers for future pensions. The white-collar workers’ pension plan has been frozen already, and officials said their benefits would be unchanged.

G.M. said that in the coming weeks, about 42,000 of its 118,000 retired salaried workers would get letters offering the chance to trade their regular monthly pension checks for a single upfront payment. Those who choose the big check would receive it by September. The conversion factor for calculating the value of the single check was established by law in 2006.

For retirees who do not accept or are ineligible for the lump sum, G.M. will purchase a group annuity contract from Prudential Insurance to pay and administer the continuing benefits.

Mr. Ammann said that G.M. was anxious to transfer the day-to-day management of its obligations to retirees to Prudential. “It allows us to focus more on our core business, which is building cars and trucks,” he said.

The lump-sum offers will be made to retirees who left G.M. between October of 1997 and December of last year. The size of the offers will vary by age, health, length of corporate service, and current pension benefits.

G.M. will spend $3.5 billion to $4.5 billion to finance the buyouts, buy the group annuities, and create the new plan for existing salaried workers. The company expects to take a charge of as much as $3.5 billion against earnings in the second half of the year for the changes.

It will also lose about $200 million a year in noncash profits that it was allowed to report because of accounting rules that apply to pensions. Those rules have been controversial among investors because they can allow companies to raise their reported earnings without improving the performance of the business.

Ford, for its part, has said it will offer lump-sum pension buyouts to all of its 98,000 white-collar retirees but has not provided details of the payments or how the offer would affect the company’s finances. The first wave of Ford offers is expected in August.

A version of this article appears in print on June 2, 2012, on Page B1 of the New York edition with the headline: G.M. Plans Big Buyouts For Retirees In Pension. Order Reprints|Today's Paper|Subscribe